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Financing Green Businesses
Green business is where most look for the greatest growth in America to come. Given the current economy, it is needed as soon as possible. Many home-based businesses and start ups, environmental or not, often lack a major green element – money. Ensuring a green entrepreneur has a successful idea, the financing to launch and then the cash flow to continue his or her enterprise is a vital necessity.
Ensure the business idea will work Having a good idea and a strong plan are initial steps. Many support institutions in Santa Fe and northern New Mexico help small businesses of all kinds. The U.S. Small Business Development Center, SCORE, Santa Fe Community College and WESST are just a few offering training, mentors and other services. “We help all local businesses, regardless if they are a Chamber member or not,” says Val Alonzo of the Santa Fe Chamber of Commerce.
An extensive list of resources is available at the city’s Department of Economic Development website (http://santafebiz.org/). City staff is available. “We’re here to assist business and workers towards success,” the website prominently states.
Finding a supportive community is a good step toward building a green business. Business networks to tap include the Santa Fe Alliance, which hosts regular events; “Green Drinks,” green business trainings, and others listed at http://santafealliance.com/. You can also sign up for their newsletter. The Santa Fe Incubator is another outlet. Founder and CEO Marie Longserre says, “We have a green cluster, and are working to brand identity around that group.” Open Coffee Club is held monthly at the Santa Fe Complex.
Considering Capital Options Securing capital is challenging for start-ups in general and green businesses in particular. Managing expectations is an important first consideration. Although NM has a healthy venture capital community, these equity risk investors are rare options unless the business can grow very fast (like five or ten times).
Grants are usually reserved for nonprofit charities. There are exceptions, particularly for businesses in rural areas, minority/women/veteran owned, or offering specialty niche technologies. “Our local office has to send Washington back millions of dollars in funding that goes unclaimed each year,” says Terry Brunner of the NM USDA. “We are always looking for appropriate matches for projects.” It is worth seeking help from that government agency or others who have done it successfully, as grants can be challenging to navigate.
Traditional Financing Options Local banks are still a viable option. They often offer good pricing. NM is home to many local banks that did much better than their peers nationally. “There is a gap in perception. People are hearing banks aren’t lending, period,” says Alan Austin of New Mexico Bank & Trust. “I hear people say that, and I tell them that isn’t correct.”
To make a loan, bankers need specific ways to assure they will get paid back. “People who care about the environment don’t always trust or feel they share the same values as financial professionals,” says triple bottom line business consultant Nicole Cowing of Social Enterprise Associates. “It is important for entrepreneurs to understand how bankers make decisions. They sell their products just like any other business person.” How would you convince a banker you will manage a loan?
Advance planning is something bankers value. “It is a poor strategy to have the first time a banker hears from you, when you need a loan,” says John Woosley, SBA New Mexico District Director. He encourages setting up your personal accounts at institutions able to handle your future needs, so when you are seeking a loan, you aren’t forming brand new relationships.
The SBA offers loan guarantees. “If the borrower doesn’t have enough collateral or can’t secure a loan, they can explore the option of a SBA guarantee,” explains Woosley. These are available through banks and NM micro-lenders (detailed below).
Permaculture Credit Union and other credit unions are another option, pooling financial resources of the community. PCU members believe in the ethics of Permaculture (the care of the earth, care of people, and reinvestment of surplus for the betterment of both). They understand environmental approaches, such as offering lower interest rates on loans for fuel-efficient cars. They will still have official financial underwriting.
Alternative Financing Sources There are more financing sources suited for green ideas, which accept varying levels of risk. Caveat emptor for all of these – buyer beware. Read the fine print.
Investors include family and friends. They can use services which help formalize a loan or equity agreement in a professional way so all parties have the same expectations. One example is Virgin Money (www.virginmoneyus.com).
Credit Cards allow small business owners to use personal credit to finance. America has the highest per capita consumer debt in the world. Credit card companies are becoming stricter as defaults and late pays are increasing. Deals still exist with low introductory rates, transfer offers, and inexpensive cards. Mismanagement of credit cards leads to high interest rates, cautions Finance New Mexico, another helpful local resource (www.financenewmexico.org).
Local Microlenders include ACCION, WESST, and the NM Loan Fund. They make small business loans to those not yet “bankable.” Each offers slightly different services and loan conditions. Again, it is still a loan that must be repaid.
Peer-to-peer and social loan networks are like eBay for lending. Www.prosper.com and www.lendingclub.com, among others, connect people directly to borrow and lend money online, with lenders taking parts of loans.
Accounts Receivable Financing is also called factoring. A business sells its invoices or contracts at a discount based on the risk and time to collect payment, receiving immediate cash for those accounts receivable. Factoring increases working capital and cash flow, but at a cost. This is a regularly offered service but can be expensive, so figure out the percentages.
Barter or trading goods and services for non-cash is another potential option. It is a much older version of ‘sales.’ It works better when you want what the other can offer. If a ready trade is not clear, ask. A solution might present itself that wasn’t obvious on the surface.
Approaching a financial institution Many green entrepreneurs have experience in the nuts and bolts of business operations and know that language well. They are often less familiar with banker-speak like “value proposition,” “net income” and “profitability.”
Securing financing requires an understanding of bankers and financiers. Entrepreneurs should consider not only banking buzzwords but also what bankers value. What bankers see when looking at a green start-up is different than what an entrepreneur communicates.
A financial professional needs to document how he/she will get their money back. Loan package materials should make it easy to understand how the business can repay a loan, what collateral is available and other assurances. (See the sidebar “What do banks look for?”)
Consider your strategy to seek a loan:
• Know your credit score – personal and business • Use an accounting system and monitor cash flow • Know your banker by first name • Build a long-term relationship – start small and build over time
Credit score is important. For many small businesses, the lender regards it as an extension of the individuals involved. Owners or guarantors need to know their finances. Their credit challenges will reflect on the business. Establishing credit is part of what a bank sees as “Character.”
Securing financing can be a significant hurdle for a small business or entrepreneur to overcome, but it is a crucial step in the process of translating green ideas into meaningful businesses.
What Do Banks Look For?
Banks seek to minimize risk of loan repayment. They look for the “5 C’s of Credit”:
Capacity to repay is the most important factor. A bank will not lend to a business if they are worried the business will not be able to repay the loan. Credit Score is a major indicator. Business profitability – typically indicated by cash flow or profit/loss – is important, and shown by good financial statements.
Capital includes what the entrepreneur has personally invested in the business. Personal investment increases motivation for the business’ success, and should be clear from financial statements as well as in conversations.
Collateral or guarantees include equipment, buildings, inventory, or other physical items that could be sold. Cars, for example, must be owned free and clear. They may only be valued at 50% of blue book, due to the process of selling them. The US SBA offers guarantees and has increased its levels due to the economic crisis.
Conditions are the reasons for the loan, such as opening a new store, purchasing new equipment, or launching a marketing campaign. Conditions in the business plan should show how the money spent will lead to increase business profitability.
Character speaks to how trustworthy the business and managers are. Experience, education and industry connections / relationships all communicate elements of character. They should be included in biographical summaries.
About the author
The Green Fire Times is published by Skip Whitson, edited by Seth Roffman with design by Anna Hansen, webmaster Karen Shepherd and Breaking News editor Stephen Klinger. All authors retain all copyrights. If you need to contact a particular author, or want to write for us, please be in touch.
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